MGT 4720: Strategic Management Week 45: External Analysis

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MGT 4720 Strategic Management (Week 4-5
External Analysis)

• Dr. Marshall Schminke
• Spring, 2008

These slides are intended to be a supplement to
your class notes, not a replacement for them.
For specific references, etc., see me.
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Topic Environmental Analysis(SWOT)
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The External Environment(OT)
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Environmental Analysis External

• The essence of strategy is relating a firm to its
  environment
• The key aspect of external environment is the
  industry
• Competitive intensity isnt luck or fate its
  the result of five forces (Porter).
• Key Question Do firms have different abilities
  to deal with those forces?

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So, we know what business were really in (or
want to be)
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Its Time for Environmental Analysis
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Stages of Environmental Analysis

• Scanning
• Monitoring
• Assessment
• Forecasting

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We start with the general environment

• Economic
• Legal/political
• Social
• Technological
• Demographic
• Global
• These are always initial homework
• These get the group thinking broadly

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And move on from there

• General
• Economic
• Legal/political
• Social
• Technological
• Demographic
• Global
• Industry-specific (5 forces to follow)

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What are the major issues, developments, trends,
in each?

• Economic
• Legal/political
• Social
• Technological
• Demographic
• Global

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Not just as they relate (in obvious ways) to your
business

• Economic
• Legal/political
• Social
• Technological
• Demographic
• Global

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Porters Five Forces of Competition

• Current Competitors
• Potential Entrants
• Buyers (Customers)
• Suppliers
• Substitute Products

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(No Transcript)
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Rivalry among current competitors

• "Rivalry among existing competitors takes the
  familiar form of jockeying for position -- using
  tactics like price competition, advertising
  battles, product introductions, and increased
  customer service warranties."

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Threat of new entrants

• "The threat of entry into an industry depends on
  the barriers to entry that are present, coupled
  with the reaction from existing competitors that
  the entrant can expect."

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Bargaining power of buyers

• "Buyers compete with the industry by forcing down
  prices, bargaining for higher quality or more
  services, and playing competitors against each
  other -- all at the expense of industry
  profitability."

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Bargaining power of suppliers

• "Suppliers can exert bargaining power over
  participants in an industry by threatening to
  raise prices or reduce the quality of purchased
  goods and services."

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Threat of substitute products

• "All firms in an industry are competing, in a
  broad sense, with industries producing substitute
  products. ... Identifying substitute products is
  a matter of searching for other products that can
  perform the same function as the product of the
  industry."

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Porters Five Forces of Competition

• Current Competitors Intensity of rivalry,
  response trends, game theory
• Potential Entrants Threat of
• Buyers Bargaining power
• Suppliers Bargaining power
• To do it right, identify prime players in each
  category, SWOT them all! (Study their habits,
  capabilities,)

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Competitive strategy is

• Taking offensive or defensive action in order to
  create a defendable position against the five
  competitive forces. May involve
• Positioning capabilities to provide best defense
• Influencing the balance of forces through
  strategic moves
• Anticipating the factors underlying the forces
  and responding to them preemptively (later, with
  Andy Grove)
• Note Its not about just one of the forces
  (current competitors)!

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Competitive strategy involves

• Both opportunity
• and threat

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Lets consider opportunities, broadly defined
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Looking for obvious possibilities for
opportunities

• Consider Chinese autos
• Geely Automobile Company
• Changfeng Motor Company Ltd.

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Opportunities

• Large and growing global
  markets (e.g., US)

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Opportunities

• Large and growing global
  markets (e.g., US)
• But tough logistics
• dealer service networks transportation
• Also, Korean and Japanese firms already
  manufacturing in US
• Solutions?

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Build them for other firms

• Daimler(Chrysler) AG partnered with
• Chinas Chery Automobile Co.
• Small cars worldwide
• Chrysler dealerships
• Dodge
• Chrysler
• Jeep

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But the flip side is threats

• For current US manufacturers (and others as
  well)

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But the flip side is threats

• For current US manufacturers (and others as
  well)
• Remember Malcom Bricklin?
• Planning to import and sell 250,000 mainland-made
  sport utilities, sedans, and sports coupes in the
  U.S. starting in 2008

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More threats

• For current US manufacturers beyond

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More threats

• For current US manufacturers beyond
• What about a 2500 car? (1/2 price of Chery
  QQ3Y, Maruti 800 (India))

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More threats

• For current US manufacturers beyond
• What about a 2500 car? (1/2 price of Chery
  QQ3Y, Maruti 800 (India))
• The Tata Nano 65 mph 50 mpg

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More threats

• For current US manufacturers beyond
• What about a 2500 car? (1/2 price of Chery
  QQ3Y, Maruti 800 (India))
• The Tata Nano 65 mph 50 mpg
• Tata Indian conglom.
  (Bidding for Jaguar
  Land Rover)

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Looking beyond the obvious for possibilities of
threat

• e.g., Why havent the Japanese done to us in
  large appliances what theyve done in autos,
  electronics?
• Matsushita makes more large appliances than
  anyone in the world
• Why dont we see Matsushita ranges, refrigerators
  down at Best Buy?
• For GE, Matsushita as potential entrant?

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Factors affecting threat severity Barriers to
entry

• Economies of scale (airlines, to follow)
• Product differentiation (soft drink branding)
• Capital requirements (airline mfg., to follow)
• Switching costs
• Consumer (new software systems)
• Producer (bagel pots to pizza ovens)

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Factors affecting threat severity Barriers to
entry

• Access to distribution channels (new automakers
  in U.S.)
• Cost disadvantages independent of scale (airline
  mfg. learning curve, to follow)
• Government policy

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Barriers to Entry Airline Ind.

• 20-40 year gate leases
• 95 landing rights
• Reservation systems
• Frequent flyer programs
• Computer pricing systems
• Hub and spoke feeder system
• Deep pockets

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Barriers to Entry Aircraft Ind.

• Boeing 787 Dreamliner

8-16 billion
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Barriers to Entry Aircraft Ind.

• Airbus superjumbo A380
• 550-800 passengers

19.5billion
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Barriers to Entry Aircraft Ind.

• Development costs of 20 billion
• Break even _at_ 250 units, 280 million each. 70
  billion! (They say 3 years.)
• Optimistic? (Boeings last new jet 420 units,
  10 years)
• In addition
• Economies of scale
• Learning curve (20 reduction in cost with
  doubled production)

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Barriers to Entry Your industry

• What keeps others out of your industry?
• Alternatively, what makes it easy for them to
  enter?

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But waitit gets even more complicated

• For each of the five forces, to what extent do
  they display
• Homogeneity?
• Stability?
• Connectedness?
• Munificence?
• Concentration?
• Differences on these dimensions influence
  threats, bargaining power, and building
  defensible positions

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Opportunities and Threats A real-world story
some lessons

• Andy Grove Only the Paranoid Survive (A little
  mistitled)

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Strategic inflection points

• Fundamental change in an industry
• Tremendous threats or opportunities

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The strategic inflection curve
New Heights
Inflection Point
Decline
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Examples

• In banking ATMs
• In retailing Superstores
• In telecom Fiber optics, satellites
• In computing PCs by mail
• In television Cable, satellites
• In film Sound
• In policing COP

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How about in your industry?

• In banking ATMs
• In retailing Superstores
• In telecom Fiber optics, satellites
• In computing PCs by mail
• In television Cable, satellites
• In film Sound
• In policing COP

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Toughest question How can you tell if its
started?

• Something is different
• Misfit between stated goals and actual operations
• Growing rifts
• New framework emerges

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The 64,000 questionIs it signal or noise?

• Is there little headroom?
• Change in key competitor?
• Change in key complementor?
• Do people seem to be losing it around
  you?

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What to do?

• Listen to the voices
• Create a new industry map
• Beware of the first version trap
• Making better slide rules, buggy whips, 8-tracks,
  VHS recorders
• (Fire yourself)

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Environmental Analysis External A summary

• The essence of strategy is relating a firm to its
  environment
• Two main components to the environment
• The Industry (Porter)
• The macro-environment

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Environmental Analysis External A summary

• Where we are headed
• Competitive intensity isnt luck or fate
• Its the result of five forces (Porter).
• Key Question Do firms have different abilities
  to deal with those forces?

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Environmental Analysis External A summary

• External analysis useful because its going to
  allow you to explore the OT side of the SWOT
  (critical to your second case)
• Its so critical as a building block, were going
  to do a first case focused only on industry
  analysis
• The question there will be
• Is this an attractive industry?

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Case 1 Industry analysis

• Explore each of the Five Forces
• Follow tips in CS (Ch 1) for identifying what
  matters with respect to making an industry
  attractive
• Conclusions from that
• Overall, or not for each force?
• Bring those together for overall assessment of
  industry attractiveness
• (no s to )

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Case 1 Industry analysis

• In addition, consider macro-environment issues
• All of these matter somewhat.
• Some picked up in 5 Forces.
• Beyond those, any worthy of a special spot at the
  table?
• (If so, add section after Five Forces)
• In all Is this an attractive industry?

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Case 2 Strategic (firm) analysis

• Moving from industry analysis to (firm) strategic
  analysis
• Top 3 (or so) opportunities and threats resulting
  from each of the five forces
• Top 3 (or so) opportunities and threats resulting
  from any macro-environmental issues youve
  elevated to the table
• Cull those to top 3 (or so) overall
• Those flow directly into the SWOT for Case 2

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Next up?

• Internal analysis
• SW